Time to bank on MSME growth

With bad loans set to move to the proposed ARC, banks can turn their focus back on lending to MSMEs

In a sustained effort to revive the economy, the focus is back on micro, small and medium enterprises (MSMEs). The critical role of MSMEs is driven by its immense potentiality among others, to create employment and livelihood opportunities, more importantly, its connect with masses. It engages 120 million people in its 63.4 million units, accounting for close to 30% of national income, 45% of exports.

It is the worst hit sector in every key long-term policy move – be it demonetisation, rollout of the GST regime and now the catastrophic pandemic impact. Thus MSMEs, the huge pie of the economy with its multiplier impact on the lives and livelihood, need nursing.

Realising the dependency of masses on its potential revival, the Atmanirbhar Bharat Abhiyaan (ANBA) has well-articulated sops for revitalising the sector. Even Economic Survey 2020-21, Union Budget 2021-22 and Monetary Policy Review of RBI-February 2021 contained supportive measures for inclusive growth of the sector. Despite decades of efforts and policy thrust by the MSME ministry, the sector’s connect with the government and formal financial ecosystem is still nascent.

Only 9 million units (14%) are registered, of which barely 3 million (4.7%) borrower units are using the formal banking system to avail credit facilities. The sector badly suffers from lack of literacy, technology, skills, knowhow and knowledge to access the formal channels.

Redefining MSMEs

Among the reforms to resurrect the sector, the very definition of MSMEs has been changed and made broad-based abolishing the distinction between manufacturing and service sector to make it simple and inclusive to pass on institutional support. The definition and size of the unit is now simply linked to investment in plant and machinery/equipment (IPME) and annual turnover.

Accordingly, MSMEs are re-classified. A micro enterprise will have IPME up to Rs 1 crore and an annual turnover under Rs 5 crore. Small units will have IPME greater than Rs 1 crore but not more than Rs 10 crore and the range of annual turnover is between Rs 10 crore and Rs 50 crore. Medium unit will have IPME between Rs 10 crore and Rs 50 crore and an annual turnover of more than Rs 50 crore and less than Rs 250 crore. The simplified definition and classification will help entrepreneurs register fast to obtain institutional support to develop and access credit through the formal financial system.

Towards Self-reliance

The shift in focus is now on ease of doing business for the sector with multiple policy support under the ANBA, developed as a means for import substitution. Under ANBA 3.0 the scope of collateral-free government-guaranteed loans — Emergency Credit Line Guarantee Scheme (ECLGS) 2.0 is expanded to cover units and businesses of even units with outstanding credit up to Rs 25 crore.

Units with a turnover of above Rs 50 crore to Rs 500 crore is too come under ECLGS 2.0 The scheme is open up to March 31, 2021, or until the limit of Rs 3 lakh crore. As on January 8, 2021, banks/NBFC have disbursed Rs 1,65,886 crore against a sanction of Rs 2,14,083 crore, benefitting close to 45 lakh borrowers. Other support measures include:

• A corpus of Rs 10,000 crore has been provided for leveraging an equity infusion of Rs 50,000 crore in MSME units under Funds of Funds Scheme
• Rs 20,000 crore is set aside as subordinate debt assistance to stressed MSMEs to cover even non-performing loans
• Another Rs 4,000 crore is made available to Credit Guarantee Fund Trust for Micro and Small enterprise, mandated to provide partial credit guarantee support to banks to enable them to lend to ailing units
• Besides rationalisation of Customs duty, criteria for tax audit exemption limits have been increased from turnover of Rs 5 crore to Rs 10 crore
• No global tenders to be floated for procurement of up to Rs 200 crore
• Union Budget 2021-22 allocated Rs 15,700 crore for Prime Minister’s Employment Generation Programme. It provides margin money subsidy for micro enterprises
• Manpower to be trained by realigning National Apprenticeship Training Scheme by providing post-education coaching
• New registration is encouraged under ‘Udyam Registration’ with local industry department at district levels actively engaged in enrolling new units

Credit Flow

Bank loans to MSMEs are classified as priority sector loans with a sub-target of 7.5% of them to go to micro enterprises. The risk weight on loans to MSMEs under ECLGS is zero. Loans to the sector under other schemes carry 20% risk weight for computation of capital adequacy ratio.

The lower the risk weight, the lesser the pressure on capital and more encouraging for the banks to lend. In the last two years, the credit to MSME did not grow. The outstanding loans to MSMEs remained almost flat — from Rs 37.4 lakh crore in December 2018 to Rs 38.9 lakh crore in December 2020, and that too due to disbursements under the ECLGS.

Banks Push

The RBI recently exempted banks from the need to maintain the cash reserve ratio (CRR) on the amount of fresh MSME loans granted to new borrowers who have not so far availed any loan from the banking system. The exemption is open to encourage lending to new MSME borrowers for incremental loans granted by banks from January 1 to October 1, 2021. The reprieve is meant to boost the connectivity of new units with the formal banking system.

With the stock of existing bad loans set to move to Asset Reconstruction Company (ARC) to be formed soon, banks can focus back on lending to MSMEs too. All the policy interventions for improving the sector are meant to enable ailing units to restart their operations and integrate with the mainstream of the economy so that its full potentiality can be harnessed. Looking to better risk-adjusted return on the MSME portfolio and cross-selling opportunities for business growth, banks should tap the emerging scope.

MSME forums, NGOs, successful and stronger units among them should come together to educate and inform the entrepreneurs to ensure that the advantages of the government policies under the ANBA reach the target group. The MSME centricity of the ANBA should be a stepping stone to strategically position the sector in a high growth trajectory.

(The author is Adjunct Professor, Institute of Insurance and Risk Management [IIRM], Hyderabad. Views are personal)

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